TAXATION LAW2
Answer to question 1:
Issues:
Will the taxpayer be held liable for tax for the receipt of compensatory damages under
“Division 6” or “subsection 25 (1), ITAA 1936”? Is the receipt of interest from the damages
pay-out will be included into the assessable income of the Our Earth Pty Ltd? Will the
taxpayer be held liable for assessment purpose for the reimbursement of the legal expenditure
occurred by Our Earth Pty Ltd?
Laws:
Typical compensation receipts that are received by the taxpayer includes the
insurance payments, receipts by the business from another party that have failed to carry out
their contractual obligations, payment that are received for entering into the restrictive
covenants and loss of usage of money will be considered as income in nature (Woellner et al.,
2016). A compensation receipts that is received by a business as the right of seeking
compensation or due to the cause of action or any form of proceedings introduced by
business as the right or in relation to the underlying asset are treated as compensatory
receipts. Compensation received as the damages will be included into the assessable income
with respect to ordinary meaning of “Division 6 of the ITAA 1997” or will be included as
statutory income.
As defined in “section 25 (1), ITAA 1997” compensatory payments that are received
is considered taxable given the payments that are received is related to the loss of income,
particularly the profits or interest from previous years (Braithwaite & Reinhart, 2019). The
law court in the “Mc Laurin v FC of T (1961)” held that receipt of compensation was
considered taxable within the legislative provision of “subsection 25 (1), ITAA 1936” till the
portion of payment that is received was recognizable and assessable as income.

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